About the Compound Interest
Compound interest pays you interest on the interest you already earned, which is why a modest return over a long period beats a large return over a short one. Enter a starting balance, an optional monthly contribution, and a rate, and this calculator separates what you paid in from what growth added.
How to use the Compound Interest
- Enter your starting balance, or zero if you are beginning from scratch.
- Add the amount you plan to contribute every month.
- Enter the expected annual return and choose how often interest is compounded.
- Read off the final balance and the split between contributions and growth.
The formula behind it
A = P(1 + r/n)^(nt) for the lump sum, plus the future value of an annuity for the recurring contributions.
Frequently asked questions
What return rate should I assume?
Use a conservative figure. Broad stock market indices have historically returned around 7% a year after inflation over long periods, while savings accounts return far less. Modelling an optimistic rate is the most common planning mistake.
Does compounding frequency really matter?
Less than most people expect. Moving from annual to monthly compounding at 7% raises the effective annual rate to about 7.23%. Contribution size and time invested matter far more.
Is inflation included in the result?
No, the figures are nominal. To see purchasing power, subtract your expected inflation rate from the return rate before you calculate.
Why is the last decade of growth so much larger?
Because compounding is exponential. The balance is largest at the end, so the same percentage return generates the biggest absolute gain in the final years — which is the case for starting early.